HC Deb 13 July 1976 vol 915 cc404-12

'.—(1) Where a testator dies leaving a surviving spouse and a person under the age of 18 entitled to claim legitim, and provision is made in his will or other testamentary document for a disposition to his spouse which, if it could take effect, would leave insufficient property in the estate to satisfy the entitlement of that person in respect of legitim, the following provisions of this section shall apply.

(2) Subject to subsections (3) and (4) below, tax shall be charged at the testator's death as if the disposition to the spouse did not include any amount in respect of legitim, but if within the period mentioned in subsection (8) below the person or persons concerned renounce their claim to legitim, tax shall be repaid to the estate calculated on the basis that the disposition to the spouse did include the amount renounced, and the tax to be repaid shall carry interest at the rate for the time being set out in paragraph 19(1)(c)(i) of Schedule 4 to the Finance Act 1975 from the date on which the tax was paid.

(3) The executors or judicial factor of the testator may, in accordance with the provisions of this section, elect that subsection (2) above shall not apply but that subsection (4) below shall apply.

(4) Tax shall be charged at the testator's death as if the disposition to the spouse had taken effect, but where the person or persons concerned claim legitim within the period mentioned in subsection (8) below, tax shall be charged on the amount so claimed calculated on the basis that the legitim fund had been paid out in full at the testator's death and the tax chargeable thereon had been apportioned rateably among the persons entitled to claim legitim and the amount of tax charged shall carry interest at the rate mentioned in subsection (2) above as if paragraph 19(1)(b) of Schedule 4 to the Finance Act 1975 had applied.

(5) Section 8(3) and (4) of the Finance Act 1894 and section 25(5)(a) of the Finance Act 1975 shall not apply in relation to tax charged by virtue of subsection (4) above but the person liable in respect of that tax shall be the person who claims legitim and any person mentioned in section 25(5)(c) of that Act, and section 27(1) of that Act shall apply in relation to the person who claims legitim as it applies in relation to the personal representatives of a deceased person.

(6) Where within the period mentioned in subsection (8) below a person renounces his claim to legitim, that shall not be a transfer of value.

(7) Where the executors or judicial factor of the testator decide to make an election under subsection (3) above they shall give notice in writing of that election to the Board within two years from the date of death of the testator or such longer period as the Board may permit.

(8) For the purposes of subsections (2) and (4) above, a person shall be treated as having claimed legitim unless he has renounced his claim before attaining the age of 18 or he renounces his claim within two years of his attaining that age or such longer period as the Board may permit.

(9) Where a person dies before attaining the age of 18 or before making a renunciation under subsection (8) above the provisions of this section shall apply in relation to that person's executors or judicial factor as they would have applied in relation to that person if that person had attained the age of 18 with the substitution of the date of death of that person for the date on which a person attained that age, but where the executors or factor renounce a claim to legitim in respect of a person the amount renounced shall not be treated as part of that person's estate.

(10) Where subsection (2) above applies in relation to any estate, then notwithstanding anything in paragraph 24 of Schedule 4 to the Finance Act 1975 the Board may repay tax under that subsection without limit of time.

(11) Where subsection (4) above applies in relation to any estate, then notwithstanding anything in section 11 of the Finance Act 1894 or paragraph 25 of Schedule 4 to the Finance Act 1975 a certificate of discharge may be given under the said section 11 or the said paragraph 25 in respect of the whole estate, and notwithstanding anything in section 8(7) of the Finance Act 1894 or paragraph 23 of Schedule 4 to the Finance Act 1975 the giving of the certificate shall not preclude the Board from claiming tax under subsection (4) above without limit of time.

(12) In the case of a testator who died before 13th March 1975, any reference in this section to tax includes a reference to estate duty.

(13) This section has effect in relation to the estate of any testator who died after 12th November 1974 and extends to Scotland only'.—[Mr. Denzil Davies.]

Brought up, and read the First time.

5.8 p.m.

The Minister of State, Treasury (Mr. Denzil Davies)

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

It will be convenient to discuss also the following amendments to the new clause: Amendment (a), in subsection (4) after second 'death', insert '(excluding that part of the fund renounced before any claim has been made)'. Amendment (b), in subsection 4 after third 'legitim', insert '(excluding any who have renounced as aforesaid)'.

Mr. F. P. Crowder (Ruislip-Northwood)

On a point of order, Mr. Deputy Speaker. I apologise to the House for having criticised the Leader of the House for not being present during the previous debate. I now understand that it was no fault of his. I therefore withdraw my criticism and my strictures. I understand that he was engaged in a parliamentary Committee. I am sorry if I have been unfair to the right hon. Gentleman.

Mr. Davies

The new clause provides special capital transfer tax rules necessary to deal with the treatment of the right of minor children to claim legitim on the death of a parent under Scottish law. This is a peculiarly Scottish problem and the new clause applies only in relation to Scotland. The clause is complicated, but I shall try briefly to explain the reasons for it.

Under Scottish law, if a person dies leaving a surviving spouse and children, the surviving spouse has a legal right to one third of the net movable estate and the children have a legal right, known as legitim, to another third. These legal rights take precedence over the terms of the testator's will, though the spouse or children may, if they wish, renounce their legal rights so that the terms of the will become effective.

In the normal way there is no particular difficulty about the application of the capital transfer tax legislation in relation to legal rights, but a problem arises if a person dies leaving a spouse and minor children and provides in his will for the spouse to take the whole of the estate, thus impinging on the children's legal rights to one third of the estate. The same problem arises where the wife is given only part of the estate. Generally speaking, under Scots law a child cannot make an election to claim or renounce his legal rights while still minor. The ultimate destination of the property left to the wife, to which the children nevertheless have legal rights, is is therefore uncertain until the child reaches majority.

The clause is necessary to provide for the capital transfer tax treatment which is to apply in this situation. The scheme of the clause is to provide the executors of the testator with an option. They can choose to pay tax at the testator's death as if the child had claimed his legal rights and the terms of the will had been ineffective. In other words, the first option is for the executors to be able to treat the matter from a tax point of view as if the legal rights override the terms of the will. In that event tax will be paid on the child's share pursuant to legal rights. The spouse's share will he exempt under normal capital transfer tax provisions.

If the child reaches majority and renounces his rights, as I believe is quite customary, in favour of his mother, under the scheme of the clause the renunciation of his rights is not treated as a gift and taxed. The tax paid at death in respect of the child's third share is repaid by the Inland Revenue with interest to the deceased's estate. That share then becomes the mother's share and her share is exempt from capital transfer tax. The net result in that event will be broadly the same as if the will had been effective in the first case and the spouse exemption had applied to all the property destined for the wife under the terms of the will.

The other possible alternative is for the spouse exemption to be claimed at the testator's death on all the property destined for the spouse under the will, including the part representing the child's legal rights. In other words, the executors can treat the situation pursuant to the will and not pursuant to common law or legal rights.

If the child decides to claim his legal rights when he reaches the age of majority, too little tax will have been paid on the testator's death. The testator's death will have secured an exemption not only for the mother's rights but for the child's rights, and when the child reaches the age of majority he will claim that part of the estate for himself. In that case too little tax will have been paid and tax will be repaid to the Inland Revenue with interest.

5.15 p.m.

The other main feature of the clause is that it negates the capital transfer tax charge that would otherwise have occurred if and when the minor child renounced his legal rights on attaining majority. If the child renounces his rights on attaining majority, they go back to the mother. The new clause negates the capital transfer charge that otherwise would arise because it would be treated, possibly, as a gift.

The new clause has taken some time to appear in legislation because we have had close discussions with the Law Society of Scotland, to which I am grateful, on the best form and the best way of dealing with this difficult problem of providing relief from capital transfer tax provisions given the peculiar position in this instance under Scots property law. I believe that I am authorised to say that the clause has the full agreement of the Law Society of Scotland. There has been considerable discussion of the problem and I commend the clause to the House.

Lord James Douglas-Hamilton (Edinburgh, West)

I thank the Minister of State for bringing forward the new clause and for his expert summary of Scots law on this subject. Those who are not aware of what legitim is will find that the best brief description is given by Professor David Walker in his book "Principles of Scottish Private Law". He states: Legitim…or bairn's part, is the legal right of children and more remote issue to a share in a deceased parent's moveable estate.…At common law claims were limited to legitimate children but illegitimate children now have an equal claim. That arrangement has worked very well over the years.

I speak briefly to amendments (a) and (b), which I believe will improve the clause. Their purpose is to remove an anomaly that could lead to unfairness. Under the common law of Scotland, as the Minister has said, the surviving spouse and children of a domiciled Scot have claims to a share of the movable estate once the death and funeral expenses have been deducted. That happens before the deduction of capital transfer tax. These claims under Scots law override the will of the deceased.

By statute these claims have also been extended to a widower's share in his wife's estate and to the issue of a pre-deceasing child. Their claim is in the nature of a debt, although normal debts are dealt with first and take precedence. Where the child or remoter issue has not attained the age of majority, the executors have a duty not to allow the claim to legitim to be defeated before the child or more remote issue has reached majority. When the child is of majority, he can renounce his claim to legitim.

I must thank the Minister for having met the claims and representations of the Law Society of Scotland, but there is one outstanding matter that I must put before him. It is often the case that a spouse leaves a will entirely in favour of the surviving spouse, and, were it not for the legal rights position in Scotland, no capital transfer tax would be paid.

However, the clause gives two options. In the first place, the executors may set aside a fund to meet legitim claims at the death of the first spouse and pay tax on them, thereby limiting the income and capital devolving upon the surviving spouse. On the other hand, they may treat the whole estate as devolving upon the surviving spouse on the assumption that the children or remoter issue will renounce their claims to legitim, in which case the spouses exemption applies to the whole estate.

The problem for the Government arises in that some may claim legitim and others may renounce their share. However, they cannot renounce until they have reached majority. The calculation of the amount of tax payable could present difficulties. The amount of the legitim fund would not be known until the last child or remoter issue had renounced or claimed its share.

The amendments seek to meet this difficulty by limiting the legitim fund for calculation purposes to the shares of those who have not effectively renounced at the time that the first claim is made. Thus the taxable share of the legitim fund could always be exactly quantified. I hope that the hon. Gentleman will recognise the equity of the amendments and will accept them in due course.

Mr. Nicholas Fairbairn (Kinross and West Perthshire)

I support my hon. Friend the Member for Edinburgh, West (Lord James Douglas-Hamilton). The Minister began with a strange point of view. He said that the position was caused by the peculiarity of this branch of the Scots law of property. I differ from him because I think that the situation is normal and the difficult arises—and the new clause is necessary—because of the peculiarity of law of testacy in England, not Scotland. Our law is fairer and more democratic, because it ensures that no parent, for whatever reason, can cut out his spouse or children from at least one third of the movable property.

The difficulty arises—and my hon. Friend put the case well—because frequently the renunciation which is undertaken is not that which merely has to be an agreement. If the children do not say that they will renounce their rights so that "Mum will get it all", they say that under the terms of the will they will get such and such and if they do not claim legitim, they will not get the benefit. The child has to not ask whether it is to his benefit to renounce legitim and not to put it into the spouse's share but whether to claim the children's share or take what he is specifically left.

There are difficulties in the case where there is a family of five children aged from 32 to 8. The matter cannot be resolved if the 32-year-old decides to take what he is left in the will and to renounce legitim, the 24-year-old decides not to do so, the 19-year-old to do so, while the other two children under the age of majority cannot make a decision for another ten years. The amendments fictionally divide the fund into the part which can be chosen or rejected and the part which cannot be chosen or rejected, and that is an important change. The matter is complicated. The tax difficulties of the rejection of legitim to obtain testamentary benefits are more complicated than we have perhaps understood.

I should like the Minister's comments on another matter. Is it fair that interest should run either for or against a child or spouse? The child who opts for rejection or acceptance cannot benefit if he happens to have a kid brother who is 6 months old, who must wait 17½ years to make a decision. Interest would be running for 17½ years after the taking of that option. Although it appears to be fair, it is unfair that a person should be forced to pay interest on a decision over which he has no control.

I hope that I have not complicated the matter too much. Part of the equity of the law of Scotland ensures—whatever characteristics of canniness or meanness we may have—that one-third of what we have will go to our spouse or that half will go to our children if we have no parent left. That is a matter of equity and I hope the tax legislation will preserve it.

Mr. Gordon Wilson (Dundee, East)

I do not want to take up much time, but I want to pay tribute to the Treasury and the Government for the new clause, which recognises the different legal position in Scotland.

I associate myself, for once, with the remarks made by the hon. and learned Member for Kinross and West Perthshire (Mr. Fairbairn) about the situation of legitim. It is a sensible proposal and it is wrong to say that it is peculiar to Scotland. One might say that it is more peculiar for England not to operate that law.

Whilst the clause will take care of anomalies, it adds to the complexity of the tax set-up and it will give rise to further anomalies. It appears that there is a degree of uncertainty created by the way in which the Government have tackled the clause. It seems to leave a gap in the arrangements and, at face value, it appears that it is right that the gap which applies to the legitim fund should be dealt with in a manner conducive to certainty.

One of the problems of dealing with trust estate involving families with a wide-ranging age group is that of the distortions created by the wide differential. I hope that the Government will listen to the arguments. They are not new, be- cause they have been put to the Treasury by the Law Society of Scotland. I ask the Government to accept the amendments.

Mr. Denzil Davies

The hon. Member for Edinburgh, West (Lord James Douglas-Hamilton) has suggested two important amendments and I entirely agree with the justice of his case. I propose to recommend to the House that the amendments be accepted, because they improve the new clause in an important respect and they make it fairer.

The matter is complicated. I understand that the wording of the original amendment has been slightly changed and that the hon. Gentleman now wishes to refer to "excluding any part". I prefer that. The hon. Gentleman took me to task for using the word "peculiar". I was using it with its original meaning of "different", not "odd". I was referring to the difference in Scots law.

The hon. Member for Edinburgh, West referred to interest. While I cannot make any commitment, I can see that there is something in the argument and that it might seem right to charge interest in one case and pay interest in another. I do not want to make any commitment, but I will look at this to see whether there is a case for having a limitation on the charge of interest. If we decide, after consultation, that that is a good solution, we shall take action.

The matter is difficult, the right way to deal with it is to ensure that the fiscal provisions accord with Scots property law and I hope that the House will accept the clause with the amendments.

Question put and agreed to.

Clause read a Second time.

Amendments made to the proposed new clause:

(a) in subsection (4) after second 'death', insert '(excluding any part of the fund renounced before any claim has been made)'

(b) in subsection (4), after third 'legitim', insert '(excluding any who have renounced as aforesaid)'.—[Lord James Douglas-Hamilton.]

Clause, as amended, added to the Bill.

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